AbbVie’s $63 Billion Mistake

Overpaying for Allergan would be a serious misstep.

Michael Douglass
Michael Douglass
Jun 25, 2019 at 9:21AM
Health Care

AbbVie (NYSE:ABBV) announced this morning its intention to acquire Irish drugmaker Allergan (NYSE:AGN) in a stock-and-cash deal for $63 billion (or $188.24 per share). More specifically, AbbVie is offering Allergan shareholders $120.30 in cash and 0.866 AbbVie shares per share of Allergan they currently own.

AbbVie absolutely should pursue an acquisition -- more on that in a minute -- but buying Allergan (especially at a 45% premium to yesterday's closing share price) is a terrible move.

Here's why.

Why AbbVie needs a transaction

In a word: Humira. The world's best-selling drug in 2018, autoimmune drug Humira is now set to become a serious albatross for AbbVie, as patent expirations and biosimilar competition outside the U.S. chip away at its revenue. For reference, last quarter, Humira's international revenue dropped by 28% year over year, even while domestic revenue increased by 7%. U.S. revenue should be safe until around 2023, but AbbVie is staring down a scary patent cliff given that Humira accounted for 57% of the company's total adjusted revenue last quarter.

Man watching stock chart on chalkboard decline, has hands in hair, clearly stressed.

It's never fun to watch your top-line decline. Image source: Getty Images.

Put differently, AbbVie is now in danger of becoming a victim of its flagship drug's previous success.

AbbVie has been working hard to plug that hole with a variety of autoimmune drugs, hoping to shore up its market position as Humira's inevitable decline comes into more focus. AbbVie's autoimmune drug Skyrizi recently received FDA approval for psoriasis and is in phase 3 testing for a variety of other indications, including Crohn's disease, ulcerative colitis, and psoriatic arthritis. Rheumatoid arthritis drug upadacitinib is next up on deck, with an FDA review anticipated by third quarter. Analysts think these drugs might ultimately generate a combined $9.5 billion in annual peak sales -- a hefty chunk, to be sure, but far less than the $19.9 billion Humira achieved just last year.

To summarize: AbbVie doesn't have impressive growth prospects without an acquisition. It needs one to reinvigorate growth.

Why this is the wrong one

AbbVie needs to acquire a growing company with a huge pipeline stocked full of opportunity. Allergan is not that company.

In the most recent quarter, Allergan reported a 2% decline in revenue and a measly 1.3% growth in non-GAAP income per net share. Botox, Allergan's flagship drug, is slowly growing but faces an increasingly competitive landscape.

That wouldn't necessarily be a deal breaker if Allergan had massive opportunities in its pipeline. But it really doesn't.

That's not to say it doesn't have some opportunities -- it does -- but most don't look to be that big. For example, analysts think that Bimatoprost SR -- a proposed glaucoma drug Allergan hopes to see approved in 2020 -- might hit around $600 million in peak annual sales by 2026. For a company that did $15.8 billion in revenue last year, that's just not going to be fundamentally needle moving.

Allergan's largest potential drug is abicipar in wet age-related macular degeneration (or AMD), which could generate as much as $3 billion in peak annual sales per the company. Unfortunately, the drug has been shown to have some safety issues that may prevent it from competing effectively against other proposed treatments for wet AMD (like Eylea and brolucizumab from Regeneron and Novartis, respectively). More specifically, 8.9% of abicipar patients had intraocular inflammation, a rate double or more that reported for competitor drugs.

Plus, the March failure of its late-stage depression drug rapastinel in clinical trials deals further blows to its investment thesis.


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And the price is too high

AbbVie is proposing to acquire Allergan for $63 billion, just north of a four-times multiple on its 2018 revenue. That valuation isn't unheard of in biotech, but usually that's because a company has huge growth opportunities it would struggle to fully execute on its own.

Allergan just isn't that company. (And for what it's worth, given that Allergan anticipates non-GAAP net income per share of $3.50 this year at the midpoint, AbbVie's $188.24-per-share proposed buyout price looks ridiculous along a price/earnings metric as well.) There's also no hint of a tax inversion like Pfizer attempted back in 2016, whereby the acquiring company would lower its tax rate by redomiciling in Ireland. And frankly, the $2 billion in anticipated combined synergies just isn't enough to make this attractive.

For what it's worth, I think Allergan shareholders should be thrilled. Even though the proposed buyout price is far below the $160 billion Pfizer was offering in 2016, given the less-than-stellar business performance at Allergan, I personally believe it's a good deal for them.